The US Federal Reserve will end its huge, QE3 programme of asset purchases in October if the economy stays on track, according to the minutes of its June meeting.
The Fed has been slowing its asset purchases by $10bn every meeting this year and they currently stand at $35bn-a-month. That left doubt about whether the purchases would end in October or December – crucial for judging when the first increase in interest rates might arrive.
In its minutes, the central bank says they will end with a $15bn taper in October unless there is a surprise on the economy. That signals a clear end-date for the programme for the first time after which attention will turn to a first rate rise.
“If the economy progresses about as the Committee expects, warranting reductions in the pace of purchases at each upcoming meeting, this final reduction would occur following the October meeting,” say the minutes.
The Fed also made significant steps on agreeing its “exit strategy” when the time does come to raise interest rates. These decisions will shape how future Fed policy is communicated to financial markets.
According to the minutes, “many” Fed officials want to keep reinvesting income into their asset purchases until at or after the time that interest rates rise. That would be a change to the current strategy of stopping reinvestment before raising rates.
When the Fed does start to raise rates, it is likely to express its target Federal Funds rate as a range, like the current 0 – 0.25 per cent, instead of giving a single number as it did in the past. “Many” officials indicated “a preference for continuing to announce a target range”.
That will allow the Fed to make only minimum use of its new reverse repo facility – a way for non-bank players such as money market funds to make deposits at the Fed – in order to minimise any distortion to financial markets.
“Many participants judged that a relatively wide spread – perhaps near or above the current level of 20 basis points – would support trading in the federal funds market and provide adequate control over market interest rates,” say the minutes.
The Fed also looked at possible changes to the calculation of the Fed Funds rate to make it more reflective of bank lending conditions and take account of international efforts to reform benchmarks such as the London Interbank Offered Rate.
On the economy, the Fed remained dovish, with some participants concerned about it staying too low balanced by those worried about it being too high.
Many officials judged that there is still a lot of slack in the economy. “A number of them thought it was greater than measured by the official unemployment rate,” say the minutes, “citing, in particular, the still-high level of workers employed part time for economic reasons or the depressed labour force participation rate.”
Fed officials showed little concern about imminent wage rises. “Several noted that a return to growth in real wages in line with productivity growth would provide welcome support for household spending.”
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